China and the World of Business • China Business and the World

Back at the beginning of February I wrote that the troubles that have led Dell to boot Kevin Rollins and to create what the company is calling “Dell 2.0” all began when the company’s business model hit a high water mark in China in 2004. (“Dell Freezes Over“).

The first commenter to respond was a gentleman identified as “RichardatDell,” who is either a Dell PR person or somebody at Dell’s PR agency. Richard, for obvious reasons, took strong exception to my points.

Rather than respond to him in a comment, I promised I would respond in a new post. and now, a little over 10 weeks later, here is my much belated reply.

Allow me to retort

First, he said:

“Dell’s competitors are not free to act only in the customers’ interest because they must factor in value for their resellers and distributors. That means the customer is third in line. Not so at Dell.”

Right. And Dell must factor in cost for their sales organization and for customer support – which, if you believe consumer polls, have not done much for customer satisfaction. But we’ll address that later.

Dell’s point about factoring in profit for the channel is correct – assuming you believe, of course, that Lenovo, one of Dell’s largest competitors in China, does not act in the customers interest in their company-owned stores around China. Frankly, I think a lot of Lenovo customers would disagree.

It also assumes that the channel adds no value, or adds negligible value to the process. If you assume that all of your customers know enough about computers to purchase them mail order, that’s true. In reality, there are a lot of individuals out there who don’t know all that much about computers and need considerably more hand-holding and service.

Indeed, consumer trends in China underscore that they want that support – not just with computers, but with mobile handsets, appliances, big-screen TVs, and the like. They want these complicated items delivered, unpacked, set up, turned on, and adjusted for them.

“Dell, its direct model and the competitive advantages that made us number one and a global competitor rest in more than simply efficient ordering and product production processes. The direct model is not about processes. It’s about relationships.

I think the direct model is in part about relationships: between Dell and its employees, suppliers, and yes, its customers. I would argue that these are things that are the hallmark of any successful business in any competitive industry. I know it has been in every business I’ve been involved in my entire career.

But this is not, by any means, all of the story. I’ve got Michael Dell’s book Direct from Dell here next to me, and he says so himself.

What has made Dell unique among its competitors, however – it’s differentiation – is the other parts of the model: tight vertical integration, to the extent of bringing suppliers inside the business; turning the competition’s greatest strength into a weakness (which is what they’re trying to do to all of those big bad companies who sell through retailers); and exploiting the Internet, and dragging every efficiency out of the production process.

Whatever Dell’s “customer relationships” are like in the U.S., they aren’t much in China. I was a Dell owner for 4 years from 1999 to 2003. I can tell you that after the post-delivery call, I never heard from Dell again. Apocryphal? Yes.

Anyway, you tell me. What do you think brought Dell this far? It’s relationships, or direct sales backed up by efficient production?

Yeah. Me, too.

Beware of Anything 2.0

Dell 2.0 is about reinvigorating and extending the competitive and non-replicable direct 1:1 relationship with our customers to provide the best customer experience, build a strong global services business and ensure our products deliver the best long-term customer value.”

While I’m willing to give Dell some time to show me what Dell 2.0 is about, and whether Mike and his new executives can deliver on the promise. This is a high bar. How are they going to build a better services business than IBM or HP in modest period of time? How are they going to offer a better customer experience than Apple or Lenovo?

Even if they try, it’s going to be expensive. Especially when part of your solution is to open costly “experience stores” that won’t sell anything.

And, with respect, “reinvigorating and extending” the customer relationship makes it pretty clear that Dell knows they need to be doing a lot better in this department. Giving them the benefit of the doubt, that suggests that whatever Mr. Dell wrote in his book about relationships was either forgotten or took a second priority to the rest of the model. A less charitable soul might suggest that it was never part of the deal in the first place, and that any talk about “relationships” is so much window-dressing.

Xeroxing Dell

In addition, while we are investing in our business for the long term, competitors have announced they will continue to eliminate costs to maintain their ability to compete with Dell; other competitors are not making much or any profit because they need to sell products at a loss. Perhaps they have a ways to go before we can suggest Dell is easily replicated?

Specifics, please. What competitors are selling products at a loss? If a company sells products at a loss, it will lose money. Continue to do that, and you’re out of business.

If, on the other hand, a profitable competitor sells computers at a minimal profit, no profit, or a small loss, it is because they choose to add value elsewhere, like in servers, integration, software, services, or accessories.

Then, of course, there are companies like HP, who are learning to make and sell inexpensive computers that, sumbitch, are even more energy efficient.

Oh, and that snarky crack about competitors eliminating costs? We’re hearing in the Hutong about a plan to reduce up to 13% of Dell’s China staff, apparently because revenue per employee has dropped to its lowest level since 2000.

Grow to Dell

With respect to China…The region’s growth was led by 33 percent unit growth in China, where Dell was the fastest growing among the top five vendors in the region, growing at three times the growth rate of the industry.

Two questions on that. First, 33% growth on what kind of base? What was the current market share? And how have things been in Q4?

Second, where is the growth coming from? Is it in laptops (a market that is growing) or desktops (a market that is shrinking?) Is it with large corporate customers, who service themselves or are getting service someplace else, or from small businesses and consumers?

All of this is germane, because what it will tell you is to what extent this is sustainable growth, versus growth that is gained in the near term at the expense of the long term.

Dell’s Biggest Problem

I see Dells finding there way into corporations. What I don’t see or hear buzz about is Dell winning the hearts and minds of the people that are using them at work. Everyone I know who uses a Dell, laptop, docked laptop, or desktop – cordially hates the damned thing. Again, it’s apocryphal. But the plural of “anecdote” is “data.”

I don’t hear people talking about the Inspirion XPS laptops. I DO hear them talking about ThinkPads, HP Pavilions, and MacBooks.

My data may well be wrong. I’d be happy to have it proved wrong. But I suspect Dell is buying all of that growth at the expense of long-term customer satisfaction and relationships.

Now, maybe Dell 2.0 is set to change all of this. But Dell has to start by admitting that there is a problem here, not by either spinning or ignoring all of the people who aren’t happy.

Worldwide announced today are not encouraging. In the most recent quarter Dell sales dropped 14% in its core U.S. market and 6.9% worldwide. HP, meanwhile, is up 28% worldwide and 26% in the US. Lenovo is up 17.4% worldwide, Acer up 41.4%, and old Toshiba up 13%.